Loan guarantees have been around since at least the 1940s, when the U.S. government backed loans for homes, farms and businesses for World War II veterans. More recently, the U.S. government has used loan guarantee programs to support the development of clean energy. Projects including the large Ivanpah solar facility in California’s Mojave Desert, a large cellulosic ethanol plant opening this month in Kansas, and—infamously—the failed solar company Solyndra have all been beneficiaries of Department of Energy loan guarantees.
Now, loan guarantees are being considered for a different kind of application: energy access for the roughly 1.3 billion people worldwide who live in the dark. For companies that provide services to the energy-poor, the greatest challenge is not necessarily technology, but finance.
For the renewable energy industry, various financial strategies, including loan guarantees, are gaining momentum. A loan guarantee is an agreement where the guarantor such as a bank or a private investor assumes the debt for the borrower if that borrower defaults. The essential role for this strategy is to reduce risk in order to attract additional investors.
At the US-India Energy Partnership Summit in Washington DC earlier this month, several speakers pointed to the value of loan guarantees.
USAID Administrator Rajiv Shah explained that India does not need a large dose of aid assistance and that individual loan guarantees will be much more beneficial. Earlier this year, USAID provided a $2.5 million loan guarantee to clean energy service provider Orb Energy, which will allow them to reach 500 underserved communities in India. Shah noted that if done properly, loan guarantees could create $20 to $30 billion of investment activity in the next year, though this figure probably covers energy access in addition to larger scale clean energy projects.
Nonetheless, the calculated and targeted approach of loan guarantees can have a catalytic effect by leveraging efforts of multiple investors to bring clean and reliable energy to communities living off the grid.
Commercial banks are often slow to enter the fray with companies that provide energy access because of the perceived risk. This may soon change. With the renewable energy market in a growth cycle, there is substantial investment potential, as demonstrated by $45 million in aggregate investment earlier this year. Innovative companies such as M-KOPA, d.light, Off-Grid Electric, Little Sun and BBOXX benefited from investments. Today’s market for solar portable lighting alone is $200 million, and by some accounts, with long-term potential approaching $50 billion.
Of course this is just part of the picture. Access to capital in and of itself is not sufficient to move the industry forward. Entrepreneurs need proper training in order for their companies to become investment-ready.
GVEP (Global Village Energy Partnership) International does exactly this by mentoring micro-entrepreneurs to improve their business acumen, so that they will have a better chance of repaying small loans. In East Africa, GVEP created loan guarantee agreements with 13 financial institutions. So far, less than five percent of money GVEP allocated toward lending has ended in default. Mentorship is key to this achievement.
Another critical issue is subsidies—not so much to support burgeoning clean energy businesses, but cutting back fossil-fuel payments that hold clean energy businesses back. Speakers at the summit confirmed that government subsidies in India for kerosene deflate the market for alternative solutions for off-grid lighting, such as solar products. The International Institute for Sustainable Development found that India’s subsidies reduced the price for kerosene by two-thirds, making it harder for clean energy providers to compete.
Proper incentives can unlock a wealth of opportunity. India, which successfully landed a rover on Mars, still has the world’s largest population without accessible energy. Loan guarantees will be a key instrument of choice to change that.